Will (should) tax reform reform the clergy housing allowance?

Guarranteed to stir the clergy masses into paroxisms of righteous indignation would be if congress, as a part of a comprehensive tax reform, attempted to make changes to our Sacred Clergy Tax Break, the minister’s housing allowance.

There are special tax breaks for ministers and veterans and life insurance companies and blind people and gamblers. If you’re robbed or you have huge medical bills or you’re in a shipwreck or you ride your bike to work, you get a tax break.

There may be more than one tax break for ministers but the big dog tax break is our housing allowance which allows ministers to exclude a significant portion of their income from income taxes. (There are two types of this: one applies to ministers who live in church owned housing, parsonages, and another where ministers live in their owned or rented housing and receive a cash HA. The current HA lawsuit and most discussion centers on the cash HA.)

I’ve seen estimates that the cash housing allowance costs the U. S. treasury around $800 million. Some think it is higher but my CPA tax blogging friend, Peter Reilly, far more of an expert than I on this, convincingly argues that the total would be much lower. I’ll go with him on this. If the total savings is half or less of that, why bother? If the goal of reform is to address the more costlier tax breaks then the HA is chump change. The mortgage interest deduction and the state/local tax deductions are in the $70 billion range. Would congress think it to be worth the rancor to go after the humble parson for half a billion or so dollars? Probably not.

If we are apt to make changes to the status quo, I have yet to meet a SBC ministerial colleague who would not trade their cash HA for being considered an employee under Social Security whereby their church would pay them like any ordinary employee and make a matching FICA contribution of 7.65%. This would cut most minister’s SECA quarterly tax bill by half, although it would mean shifting that to their church. Churches, especially small ones, may object to being forced to pay these taxes but I’d guess most would adjust. They may adjust by cutting their pastor’s pay by an equivalent amount but that would be shabby. Some churches know how to be shabby, though. But all this would be Social Security reform, not tax reform and isn’t on the table. Besides, it is odious to some churches to be taxed even if it is a matching contribution for their minister. Complications would abound.

All of this tax reform discussion is with the backdrop of the federal court suit and decision that the HA is unconstitutional. In the suit “our” side, not the aggressive atheists as the Freedom From Religion Foundation has been called, sniffs that the tax break is a freedom of religion matter, not a mundane and pedestrian tax break. Ministers that live in their owned or rented housing, should not be taxed on their housing expenses because they are expected to live close to their employer and to use their housing in part for church purposes. I’m not fully persuaded that this is a winning argument.

I favor the housing allowance and have always used the housing allowance tax break. I did so while living in parsonages, while owning my own housing, and now in my retirement. All is done perfectly legally and properly according to GuideStone’s tax advice.

My stance for some years now has been that the HA is a nice tax break for ministers. It has been called our most important tax break and no one argues with that. The fact that a small proportion of very highly paid ministers are able to exclude hundred of thousands in income from taxes presents a problem, sometimes such is an embarrassing shame to us all. This could be solved by placing a cap on the HA. It is often noted that ministers aren’t the only ones to receive an HA, military personnel do also but their allowances are limited. Clergy housing allowances have no cap. If an enterprising evangelist bought the Biltmore House and raked in enough millions in his or her ministry to put in housing expenses there would be no problem excluding it all.

For now, churches are preparing their 2018 budgets. I recommend that all of my SBC ministerial colleagues review their housing expenses and work with their churches to be sure they are taking full advantage of it.

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About William Thornton

William Thornton is a lifelong Southern Baptist and semi-retired pastor who served churches in South Carolina and Georgia. He is a graduate of the University of Georgia and Mid-America Baptist Theological Seminary. You may find him occasionally on Twitter @wmgthornton.

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Andrew

TO be completely honest if they simplified taxes to the point I could do it on one sheet of paper and not have to pay somebody to do it I would be in favor of losing my Housing Allowance. Others may disagree but taxes should be easy enough for the average person to fill out and not have to pay a professional.

October 16, 2017 10:12 am

Jeff

A one page tax return would make the taxes of most pastors much higher. Many pastors have children, and the child tax credit significantly reduces their taxes, but requires a few pages of forms. The housing allowance reduces taxes for pastors and also requires some paperwork. Many pastors adopt children and benefit from the adoption tax credit, which requires some paperwork. Some pastors save money on taxes with an HSA, which requires forms.

A “flatter” and “simpler” and “shorter” tax return would probably raise taxes on the bottom 90% and cut taxes for the top 10%. Give me the more complicated tax return, if it cuts my taxes. Turbo Tax isn’t that hard to use.

On that $800,000, I have no idea on how good the number is. The reason I say that is it overstated is that it is the estimated cost of Code Section 107 which comes in two parts. One is in-kind and the other is cash. It is only the cash part that is declared unconstitutional. There is no breakdown between the two. I suspect that the cash is higher than the in-kind so it would probably be more than half the $800k. In-kind is still, as we say, a number though. There are over 25,000 diocesan priests and anecdotally they mostly live in rectories (Although I have a call into the USCCB to clarify some details. The leader of the pack in terms of members when it comes to Christian denominations does not seem to be sweating Judge Crabb’s decision. When I searched for her on their website for her name I got the National Day of Prayer.

I think it is really nice that you have encouraged your brethren to be kind to Judge Crabb. She was appointed by a then member of SBC and is old enough that it would not be polite to mention her age.
She has the good or bad fortune to have FFRF in her district. She did rule against them at least once.

While a number of people mention that and that it comes from some federal bureaucrat, I have no memory of ever having seen the numbers that back it up.

I suspect the real number is much higher because when that number is typically cast about by the feds, it adds no details and I suspect they leave out a lot of “basketball ministers” and the like and those are the folks, I suspect, the government is unable to account for.

Joint Committee on Taxation and Treasury each have group of economists who score “tax expenditures”. It is not always the same, but they come up with the same number for 107 as a whole without breaking it down.

I don’t know how good they really are, but it is the same process by which all tax expenditures are scored.

October 17, 2017 9:17 am

John Fariss

Do you guys really believe tax reform, other than maybe to cut taxes on the richest 1 or 2%, is going to happen anytime in the foreseeable future? Congress has, what, 32 working days left this year, they have yet to pass a budget, President Trump insists they tackle Obamacare repeal & replace AGAIN, and now they are required to deal with the Iran treaty within (I think) the next 60 days? And what was given them by the President was just a one-page list of goals he wants the reform to accomplish rather than a bill to work on. And if they pass a tax cut, the money they cut will either have to be made up by increases SOMEWHERE or the resulting deficit will make the past two or three administrations look like models of fiscal responsibility!